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Sun to buy Cobalt for $2B
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September 19, 2000: 5:39 p.m. ET
Sun to enter growing server appliance market with buy of Cobalt Networks
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NEW YORK (CNNfn) - Sun Microsystems Inc. agreed Tuesday to buy Cobalt Networks, a maker of computer servers, for about $2 billion in stock.
Under the deal, each share of Cobalt (COBT: Research, Estimates) common stock will be converted to 0.5 Sun share in a swap valued at about $2 billion, the companies said.
In response to the news, Cobalt shares closed up $16.06 at $57.19, a 39 percent gain. Sun Microsystems (SUNW: Research, Estimates) stock rose $2.44 to $117.69 on a day when the Nasdaq composite surged almost 4 percent.
Mountain View, Calif.-based Cobalt makes server appliances, a new type of servers that work with other computing devices to provide data to network users. Server appliances differ from general-purpose servers because they are specifically designed to deliver one or a few network-based applications well, as opposed to general-purpose servers, which can handle a broader range of tasks but are more expensive.
Sun's president and COO, Ed Zander, said that the company was purchasing Cobalt to establish a foothold in the low-end server appliances market.
"This move is similar to our entry into the high-end server arena, which we did through our acquisition of Starfire server technology from Cray," Zander said in a statement. "Just as that product line has become one of our most successful lines to date, we think the demand for these high-volume, turnkey devices will explode in the next couple of years. Cobalt is our bet for the future."
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Ed Zander, president and COO of Sun Microsystems, chats with CNNfn about the agreement to buy Cobalt.
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Sun is paying a steep price for Cobalt, which had revenue of just $16.2 million in the quarter ended June 30. The company reported a net loss of $6 million for that quarter.
"We think this is a great strategic move, but the valuation may be questionable," PaineWebber analyst Don Young said about the acquisition in a research note. "It's a great strategic move by Sun, in that Sun is taking a stake in the emerging appliance market that could threaten their proprietary server business in the long run."
While the valuation Sun placed on Cobalt was high, "the $2 billion purchase price, versus Sun's $180 billion capitalization, is relatively immaterial, and Sun is using its highly valued stock to pay for the deal," Young said.
Cobalt raised $110 million when it went public in November 1999. In its first day of trading, it gained 482 percent, rising to $128.13.
Sun said it expects the purchase to be finalized by the end of this calendar year. After the merger, which is subject to shareholder and government approval, Cobalt will become the server appliance business unit of Sun's Network Service Provider organization. 
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